Jobless claims in the U.K. are expected to rise 60.0K in May as businesses continue to scale back on production and employment in an effort to weather the downturn in global trade, and fears of a protracted downturn could weigh on the exchange rate as investors weigh the outlook for future policy.
[U][B]Trading the News: U.K. Jobless Claims Change[/B][/U]
Time of release: [B]06/17/2009 08:30 GMT, 04:30 EST[/B]
Primary Pair Impact : [B]GBPUSD[/B]
[B][U]Effects the change in Jobless Claims had over GBPUSD for the past 2 months
[B](1 Hour post event )[/B]
[B](End of Day post event)[/B]
05/12/2009 13:00 GMT
04/22/2009 08:30 GMT
[U]April 2009 U.K. Jobless Claims Change
Claims for unemployment benefits in the U.K. rose 57.1 in April, which was less than the 85.0K rise forecasted by economists, and the data encourages an improved outlook for future growth as businesses scale back on production and employment at a slower pace. Moreover, the claimant count rate rose to 4.7%, while the unemployment rate based on the methodology used by the International Labour Organization surged to 7.1% in the three months through March, which is the highest level since August 1997. At the same time, average earnings 0.4% in the first quarter to mark the first drop since recordkeeping began in 1991, and labor conditions are likely to get worse as the region faces its worst economic downturn in over half a century. As a result, the Bank of England held the interest rate at the record-low and increased is asset purchase program by GBP 50B to 125B in an effort to jump-start the economy.
[U]March 2009 U.K. Jobless Claims Change
Jobless claims in the U.K. increased 73.7K to 2.1M in March, which crossed the wires better than the 116.0K rise projected by economists however, the labor market is likely to deteriorate further throughout the year as the region faces its worst economic downturn since World War II. Moreover, continue claims for unemployment benefits increased to 4.5% from 4.3% in February to mark the longest slump since June 2006, and is the highest level since August 1998. Meanwhile, a separate report by the International Labor Organization showed the annual rate of unemployment rose to a 12-year high of 6.7% in February as businesses may continue to scale back on production and employment as trade conditions falter. As households face a weakening labor market, the outlook for private-sector spending remains bleak, and policymakers may continue to take unprecedented steps to stimulate the economy as growth and inflation falter.
What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release. [U][B]Bearish Scenario:[/B][/U]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.
[B]How To Trade This Event Risk [/B]
Jobless claims in the U.K. are expected to rise 60.0K in May as businesses continue to scale back on production and employment in an effort to weather the downturn in global trade, and fears of a protracted downturn could weigh on the exchange rate as investors weigh the outlook for future policy. At the same time, a report by the National Institute of Economic and Social Research showed GDP contracted at a slower pace in the three-months though May, which encouraged an improved outlook for future growth, and long-term expectations for higher interest rates in the U.K. may continue to drive the British pound higher as Credit Suisse overnight index swaps show investors anticipate the Bank of England to tighten policy over the next 12 months. The preliminary GDP reading for the first quarter showed economic activity fell at its fastest pace since 1979, driven by a downturn in private spending and business investments, and conditions are likely to get worse as David Blanchflower, a former member of the BoE, projects jobless claims to average 100K per month ‘for the next year or so.’ In addition, a report by the Local Government Association said claims for unemployment benefits from white-collar employees jumped 154% in May from the previous year following the collapsed of the global financial system, and the data encourages a weakening outlook for the U.K. labor market as firms continue to lower their cost structure in an effort to weather the worst financial crisis since the Great Depression. Nevertheless, a separate report showed retail spending increased 0.9% in May, while mortgage approvals increased 43.2K in April to reach its highest level in a year, and the unprecedented steps taken on by the U.K. government should help to stem the downside risks for Europe’s second largest economy as the Bank of England expects growth prospects to improved later this year. Meanwhile, the Confederation of British Industry forecasts economic activity to remain subdued throughout the year, and said that the BoE may need to increase the scope of its asset purchase program as they expect GDP to start expanding in 2010. Moreover, the BoE minutes for the May policy meeting said some members of the MPC argued to increase the asset purchase program by GBP 75B instead of GBP 50B, while the board lowered its outlook for inflation, stating that they anticipate prices to grow at an annual rate of 0.4% this year. In addition, the MPC sees inflation holding below the 2% target rate until 2012, with Governor Mervyn King projecting a ‘slow and protracted recovery’ as private-sector consumption falters. However, as risk trends continue to drive price action in the currency market, hopes for an economic recovery later this year paired with the rise in market sentiment may lead the British pound higher over the near-term.
Trading the given event risk favors a bearish outlook for Cable as market participants expect the U.K. labor market to deteriorate further however, the less-than-expected rise in April jobless claims has left the door opening for an enhanced employment report. Therefore, if claims for unemployment benefits increase 45.0K or less in May, we will look for a green, five-minute candle following the release to confirm a buy entry on two-lots of GBP/USD. Once these conditions are met, we will set our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.
On the other hand, fears of a protracted recession paired with the downturn in global trade may lead businesses to take further steps to lower their cost structure, and a dismal labor report could lead to a sell-off in the Sterling as the economic outlook remains bleak. As a result, an in-line print, or a rise above 60.0K would lead us to hold a bearish outlook for Cable, and we will follow the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.